The Trade Debacle With China

The US trade deficit with China through October is $245 billion and will likely hit a record $300 billion for the year. It’s politically convenient to blame China, particularly its yuan policy. But the driver behind the trade deficit is a broad and enduring strategy by US corporations to shift an ever increasing range of economic activities from the US to China. And now a trade war is breaking out.

American companies have heavily invested in China. At first, they shifted basic, dirty, or dangerous jobs to China to benefit from cheap labor and loose regulations. It brought costs down for US consumers. Over the years, the trend spread to other areas of commerce, from auto components to pharmaceutical research. For example, Merck, one of the largest pharmaceutical companies in the world, announced from its headquarters in New Jersey last week that it would invest in a 500,000 sq. ft. facility in Beijing. Purpose: discover and test new drugs. Chinese jobs to be created: 600. The project is part of Merck’s $1.5 billion investment in China. An investment that will contribute to China’s growth at the expense of the US economy.

One of the jobs programs that Congress, the Obama administration, and states have trotted out with fanfare during the stimulus bonanza was green tech, and particularly solar energy. Taxpayers subsidized the sector through a mix of local, state, and federal incentives. On the federal level alone, there were investment tax credits, cash grants, depreciation bonuses, and loan guarantees. At the state level, bankrupt California has been at the forefront of subsidizing the industry.

And yet, much of solar panel manufacturing has drifted off to China. As subsidies worldwide were cut back, prices for solar panels have plummeted below US production costs and have taken down a number of manufacturers. Among the losers: US taxpayers (see the now defunct Solyndra).

The winners are at the other end of the solar industry—to the point where photovoltaic power generation is dreaming about “grid parity” again, the ever elusive concept where unsubsidized solar energy is competitive with fossil fuels. The booming (albeit tiny) industry is expected to reach 1.9GW by year end, double its capacity in 2010.

Of course, driving down the cost of solar panels to make them competitive with other sources of energy was one of the goals of the subsidies. The intent was to harness US cutting-edge technologies. Turns out, it was easier to achieve cost reductions by manufacturing in China.

Now, after years of subsidizing the US solar industry, a somewhat ironic shift in strategy: to protect US manufacturers, the US International Trade Commission jumped into the fray on December 2 with a preliminary determination that Chinese manufacturers received $30 billion in subsidies (DOE estimate) from the Chinese government and dumped solar panels on the US market, thus seriously harming US manufacturers.

Today, China struck back. This time with anti-subsidy and anti-dumping duties on cars and SUVs manufactured in the US (Reuters). China’s Commerce Ministry claimed that US automakers benefited from government subsidies—US taxpayers have moaned about this for years—and dumped their vehicles on the Chinese market. Combined, the anti-subsidy and anti-dumping duties would amount to 21.8% for GM, 15% for Chrysler, 21.5% for unidentified US automakers (Ford, Honda, and Toyota?), but only 2% for BMW.

All major automakers have heavily invested in production plants in China, by far the largest auto market in the world. Thus, most of the vehicles they sell in China are made in China. However, certain high-end US-made vehicles would be hit with these duties. It must have been hard for bureaucrats at the Commerce Ministry to find an industry to hit: so far this year, the US exported only $84 billion to China, a drop in the bucket compared to the $330 billion in imports from China.

The trade deficit and the damage it does to the US economy will only get worse as long as US corporations, in their fit of strategic short-termism, continue to invest in China instead of in the US. While it may make sense for each individual company on an investment by investment basis, if all companies adhere to the same strategy, the economic foundation of the US will continue to deteriorate. So, in addressing the trade deficit, politicians should have a chat with their corporate sponsors—instead of solely pointing their collective finger at China, though there certainly are many things to complain about, such as technology transfers, copyright violations, and trademark issues.